Firm-specic determinants of

intangibles reporting: evidence

fromthe Portuguese stock market
L dia Oliveira and Lucia Lima Rodrigues
School of Economics and Management, University of Minho, Braga,
Portugal, and
Russell Craig
National Graduate School of Management, Australian National University,
Canberra, Australia
Abstract
Purpose This paper seeks to identify factors that inuence the voluntary disclosure of intangibles
information in annual reports of Portuguese listed companies.
Design/methodology/approach An index of the voluntary disclosure of intangibles is
constructed based on analysis of the Management Report and Chairmans Letter of all 56
companies listed on Euronext Lisbon at 31 December 2003. Several hypotheses about associations
between that index and eight rm-specic variables are tested.
Findings The voluntary reporting of intangibles is found to be inuenced signicantly by size,
ownership concentration, type of auditor, industry and listing status in univariate analysis; and by
size, industry, type of auditor, and ownership concentration (and listing status to a lesser extent) in
multivariate analyses.
Research limitations/implications This study focuses on annual reports only, and is
cross-sectional. The use of content analysis and the subjective judgment involved in constructing
the index cannot be view uncritically. The small sample size is inevitable because of the small
Portuguese capital market.
Practical implications Accounting regulators will be better able to understand the factors that
explain the voluntary disclosure of intangibles by rms and use this in developing future
recommendations.
Originality/value The paper validates some previous research and also provides insights to the
rm-specic factors that explain voluntary disclosure of intangibles by companies operating in the
small share market of a European country in which capital market fund raising is not regarded to be
an important source of nancing.
Keywords Intangible assets, Intellectual capital, Disclosure, Portugal, Annual reports
Paper type Research paper
Introduction
This paper focuses on the information about intangibles that is reported voluntarily by
Portuguese listed companies in annual reports. It is motivated by the recent
recommendations of international accounting standards setters and researchers
encouraging companies to improve their business reporting by making extensive
voluntary disclosures of information about intangibles. We seek to identify the factors
that inuence those disclosure practices by answering the following question: what
characteristics of the companies listed on Euronext Lisbon are associated signicantly
with levels of voluntary disclosure of intangibles in annual reports?
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1401-338X.htm
Portuguese stock
market
11
Journal of Human Resource Costing &
Accounting
Vol. 10 No. 1, 2006
pp. 11-33
qEmerald Group Publishing Limited
1401-338X
DOI 10.1108/14013380610672657
This study contributes to understanding of the corporate reporting of intangibles by
revealing associations between voluntary disclosure of intangibles and characteristics
of rms. In particular, it enhances understanding of the determinants of voluntary
disclosure of intangibles in a small capital market of a country characterised by small
and medium enterprises whose managers generally do not perceive capital markets to
be an important source of nancing. This study of rms listed on Euronext Lisbon in
2003 also enhances understanding of how voluntary corporate reporting of intangibles
has responded to environmental and cultural challenges.
The paper is organised as follows. The next section briey outlines previous
literature on intangibles reporting. This is drawn upon subsequently to develop
research hypotheses, identify appropriate independent variables, and to outline the
research design. In the two concluding sections results are analysed and discussed.
Deciencies in the accounting model and the voluntary reporting of
intangibles
Healy and Palepu (2001) discuss several signicant factors in the economic
environment which have the potential to alter the nature of nancial reporting and
disclosure (e.g. rapid technological innovation and globalisation). They argue that the
traditional nancial reporting model fails to capture the economic implications of many
of these changes in a timely way. A decline in the level of relevance of earnings and
other traditional nancial statements items has been documented by Lev and Zarowin
(1999), Amir and Lev (1996), Collins et al. (1997) and Francis and Schipper (1999).
Deterioration in the usefulness of nancial information is argued to have been caused
mainly by the inadequacy of accounting systems to reect the increasing consequences
of rapid change on business enterprises. This inadequacy is especially pronounced
with nancial information about intangible items (Lev and Zarowin, 1999).
A majority of studies argues that current accounting models do not capture the key
factors of a companys long-term value their intangible resources (Wallman, 1995;
Canibano et al., 1999; Lev and Zarowin, 1999; Hedlin and Adolphson, 2000) and fail to
recognise a fuller range of intangibles (such as human resources, customer
relationships). This has led to claims that traditional nancial statements are losing
relevance as helpful instruments in decision-making.
Different intellectual capital[1] models and measures have been developed by
academics, research groups, professionals and organizations over the past decade
(Edvinsson, 1997; Sveiby, 1997; Stewart, 1999; Brooking, 1997). Companies are
currently experimenting with voluntary intellectual capital frameworks for internal
and external purposes (DATI, 2000; Meritum, 2002).
Concerns about the recent deterioration of accounting information are held by
academics and by accounting institutions (such as CICA, 1995; AICPA, 1994; IASB,
2000; FASB, 2001). There is keen awareness of the need to respond to the challenges
posed in particular, by developing standard measures and forms of reporting that
focus on the key elements of new economy enterprises.
The IASB (2000) considered it essential that narrative reports supplement nancial
statements to help provide useful information to users of nancial reports. Narrative
reporting was thought likely to provide additional information about the assets
recognised in nancial statements; to provide explanations of unrecognised assets; and
to help assess business risk. The FASB (2001), inuenced by the Jenkins Report
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12
(AICPA, 1994), has encouraged companies to improve their business reporting by
emulating the extensive voluntary disclosures of leading companies.
Some studies of national practices of intellectual capital disclosure have analysed
the extent and content of information disclosed voluntarily in annual reports (e.g.
Guthrie and Petty (2000) in Australia; Brennan (2001) in Ireland; Bozzolan et al. (2003)
in Italy; Rodrigues and Oliveira (2002) in Portugal; Bontis (2003) in Canada and Olsson
(2001, 2004) in Sweden). The overriding conclusion from these studies are rst, that
there is no consistent framework for external reporting of intangibles; and second, that
the intangibles information reported by companies is generally presented in a narrative
or descriptive way. Bontis (2003) conducted a content analysis on the annual reports of
10,000 Canadian companies and found that only a small percentage of them (68 out of
10,000) disclosed intellectual capital terms in their annual reports. Olsson (2004) found
a slight improvement between 1998 and 2002 in the amount of information disclosed
about intellectual capital by fteen Swedish retail companies, especially on human
capital, about which the information amount was very small.
To provide some empirical insights to the factors that might explain the type and
amount of information disclosed about intangibles, Bozzolan et al. (2003) tested the
inuence of size and industry on the extent and the content of intellectual capital
disclosures. They found that size and industry seemed to explain differences in
intellectual capital reporting behaviour among Italian companies. Garc a-Meca et al.
(2005) used univariate analysis and found a positive relation between a proactive
intangibles disclosure strategy (in presentations to sell-side analysts) and size,
international listing, market-to-book ratio and type of meeting. They also used
multivariate analyses and found that while leverage, protability, industry and an
investor relations department have no inuence on the extent of disclosure of
intangibles, a partial variation was explained by rm size and type of meeting.
Independent variables and hypotheses
In our study, the explanatory variables were divided into three groups, consistent with
Lang and Lundholm (1993) and Wallace et al. (1994), as follows:
(1) structural variables, including rm size, leverage, ownership concentration and
type of auditor;
(2) performance variables, including protability; and
(3) market variables, comprising industry, listing status and foreign activity.
Structural variables
Firm size. This is the most commonly used independent variable in studies of
accounting disclosure. Studies in the USA (Singhvi and Desai, 1971; Buzby, 1975), the
UK (Firth, 1979), Mexico (Chow and Wong-Boren, 1987), Sweden (Cooke, 1989a), Japan
(Cooke, 1992), Spain (Wallace et al., 1994), Switzerland (Raffournier, 1995), Hong Kong
(Wallace and Naser, 1995), New Zealand (Hossain et al., 1995), and France (Depoers,
2000), have concluded that there is a positive relationship between rm size and extent
of discretionary disclosure. This association has different underlying reasons:
.
Larger companies are more likely to operate in different markets or sectors
(Botosan, 1997; Depoers, 2000), to get nancing in different countries, and be
required to provide more information to stakeholders, especially nancial
analysts (Depoers, 2000; Lang and Lundholm, 1993).
Portuguese stock
market
13
.
The cost of accumulating and disseminating detailed information is relatively
high for smaller companies (Singhvi and Desai, 1971; Buzby, 1975; Lang and
Lundholm, 1993).
.
Big companies tend to employ highly skilled individuals and sophisticated
management reporting systems that are capable of providing an array of
corporate information (Depoers, 2000).
.
Smaller rms tend to be more sensitive to the risk of information disclosure
endangering their competitive position (Singhvi and Desai, 1971; Buzby, 1975;
Raffournier, 1995).
.
Larger rms are watched more closely by government agencies and are more
exposed to political costs (Holthausen and Leftwich, 1983; Watts and
Zimmerman, 1978). These rms believe that better reporting will lessen the
pressure of undesired scrutiny by government agencies (Buzby, 1975).
.
Larger rms make more extensive use of capital markets for outside nancing of
their activities. Enhanced disclosure may promote investor trust (Singhvi and
Desai, 1971; Buzby, 1975).
.
Larger rms tend to have a higher proportion of outside capital and higher
agency costs (Jensen and Meckling, 1976).
Alternative proxies of rm size include total assets (Singhvi and Desai, 1971; Buzby,
1975; Firth, 1979; Chow and Wong-Boren, 1987; Cooke, 1989a, b, 1992; Wallace et al.,
1994; Wallace and Naser, 1995; Raffournier, 1995; Giner, 1997; Craig and Diga, 1998;
Bozzolan et al., 2003); turnover (Chow and Wong-Boren, 1987; Cooke, 1989a, b; Wallace
et al., 1994; Wallace and Naser, 1995; Raffournier, 1995; Hossain et al., 1995; Giner,
1997; Craig and Diga, 1998; Bozzolan et al., 2003); market capitalization (Chow and
Wong-Boren, 1987; Lang and Lundholm, 1993; Wallace and Naser, 1995; Mora and
Rees, 1998; Bozzolan et al., 2003; Garc a-Meca et al., 2005); and number of employees.
While market capitalization is a market-related characteristic, the other three proxies
are structure-related characteristics.
From the evidence of other studies, a positive association between size and the
voluntary disclosure of intangibles is expected.
H1. There is a positive association between the extent of voluntary disclosure of
intangibles and rm size.
Leverage. Higher leverage (usually measured by the ratio of total liabilities/total
equity) suggests higher agency costs, due to the potential size of wealth transfers from
debt-holders to shareholders. Thus, rms with higher leverage have more incentive to
disclose information voluntarily, thereby hoping to reduce agency costs. On the other
hand, signalling theory suggests that a rm with a relatively low leverage has
incentive to send signals to the market about its nancial structure implying higher
voluntary disclosures.
Nonetheless, no reliable relationship between indebtedness and information
disclosure has been found in many studies in different countries and sectors (Leftwich
et al., 1981; Chow and Wong-Boren, 1987; McKinnon and Dalimunthe, 1993;
Raffournier, 1995; Aikten et al., 1997; Depoers, 2000). Based on the evidence of previous
JHRCA
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studies, there is no strong expectation regarding the sign of the coefcient of the
variable, leverage.
H2. There is an association between the extent of voluntary disclosure of
intangibles information and levels of leverage.
Ownership concentration. Agency costs increase as ownership structure becomes more
diffuse because of the increased likelihood of conicts of interest between owners
(Fama and Jensen, 1983). Firms with higher ownership diffusion have stronger
incentives to disclose information voluntarily, reducing those agency costs. However,
the research evidence is inconsistent: Ruland et al. (1990), McKinnon and Dalimunthe
(1993) and Malone et al. (1993) found moderate support for such an hypothesis, while
Raffournier (1995) and Depoers (2000) did not.
Shareholder concentration is measured by the percentage of shares owned by the
three most important and known shareholders. Because of the contradictory evidence
of previous studies, there is no strong expectation regarding the sign of this variable.
H3. There is an association between levels of shareholder concentration in a rm
and levels of voluntary disclosure of information.
Type of auditor. Auditing is a mechanism for reducing agency costs (Jensen and
Meckling, 1976; Watts and Zimmerman, 1986), mitigating the information gap, and
increasing the credibility of disclosures. Large and well-known auditing rms are
alleged to encourage companies to disclose more information (Singhvi and Desai, 1971;
Firth, 1979), for several reasons: rst, to preserve their reputation (Dumontier and
Raffournier, 1998; Chalmers and Godfrey, 2004); second, to develop their expertise
(Mora and Rees, 1998); and third, to ensure they retain their clients (Malone et al., 1993).
Empirical evidence does not support a strong relationship between size of auditing
rm and the extent of information disclosed. While Singhvi and Desai (1971),
Raffournier (1995) and Giner (1997) conrmed this hypothesis, several other studies
have rejected it (Firth, 1979; Wallace et al., 1994; Hossain et al., 1995; Depoers, 2000).
We used a dummy variable for the type of auditing rm, assigning a value of 1 if the
auditor is a Big 4 accounting rm (that is, either Deloitte & Touche, KPMG,
PricewaterhouseCoopers, or Cap Gemini Ernst and Young); and 0 in the other cases.
Because of the level of expertise of Big 4 auditing rms, it is expected that the
following hypothesis will be conrmed.
H4. Firms audited by Big 4 auditing rms are likely to voluntarily disclose more
information about intangibles than those that are audited by non-Big 4
auditors.
Performance related variables
Protability. Theoretical models of voluntary disclosure establish a positive relation
between disclosure and rm performance in the face of adverse selection. Agency
theory posits that disclosure works as a mechanism to control a managers
performance and that managers are stimulated to disclose information voluntarily to
maintain their positions and compensation arrangements. Furthermore, consistent
with signalling theory, highly protable companies are expected to be more likely to
disclose good news to avoid undervaluation of their shares. Political cost theory
supports the idea that highly protable rms have strong incentives to disclose more
Portuguese stock
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15
in order to show the market the source of their prots. In the presence of disclosure
costs, rms whose performance exceeds a particular threshold will disclose, while
those below the threshold will not (Verrecchia, 1983, 1990; Dye, 1985, 1986; Feltham
and Xie, 1992).
But the empirical evidence regarding any association between rm performance
and disclosure is mixed. Patell (1976), Penman (1980) and Lev and Penman (1990)
suggest that companies tend to disclose more frequently when they experience
favourable earnings and that earnings forecasts are, on average, associated with
positive returns. By analysing company presentations to nancial analysts,
Garc a-Meca et al. (2005) found evidence suggesting that more protable rms
disclose more detailed information on intangibles to raise management compensation
and to justify prot levels. However, other research is not so conclusive (Skinner, 1994;
Frankel et al.; 1995; Trueman, 1997).
The independent variable chosen to proxy for protability is measured by the ratio
of net income before tax divided by total assets. Because of the mixed empirical
evidence in prior studies, there is no strong expectation regarding the sign of this
variable.
H5. There is an association between the extent of voluntary disclosure of
intangibles information and the level of protability.
Market related variables
Type of industry. Membership of a given industry is argued to affect levels of voluntary
disclosure and that this can be explained by political costs, signalling, proprietary
costs, and legitimacy theory.
In the context of political costs, industry type may affect the political vulnerability
of a rm (Watts and Zimmerman, 1986). However, companies belonging to the same
sector have equal political costs.
Proprietary costs also vary according to industry. Different industries have
different characteristics relative to market competition, the type of private information,
and the threat of entry of new rms into the market. These factors provide incentives
for companies belonging to the same industry to disclose more information than rms
in another industry.
Signalling suggests that, within an industry, any deviation from established
corporate reporting practice may be perceived by the market as bad news (Giner, 1997).
Additionally, mandatory nancial reporting is claimed to be less informative in high
technology industries which make larger investments in intangibles (such as R&D,
human capital and brand development) (Collins et al., 1997; Francis and Schipper, 1999;
Lev and Zarowin, 1999). Therefore, rms with less informative nancial statements are
likely to provide more voluntary disclosures (Tasker, 1998). Bozzolan et al. (2003) show
some considerable differences in the amount of intellectual capital disclosed in Italian
annual reports between companies belonging to high prole industries and those
belonging to low-prole industries[2].
To capture the inuence of industry on the voluntary disclosure of intangibles
information, we use a dichotomous variable (applying 1 for rms belonging to high
intangibles intensive industries; and 0 otherwise, based on their SIC code) (Collins et al.,
1997; Francis and Schipper, 1999; Chen et al., 2002). It is expected that industries with
JHRCA
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16
high levels of intangibles will voluntarily provide more information about intangibles,
consistent with prior studies.
H6. Firms belonging to industries with high levels of intangibles are likely to
voluntarily disclose information about intangibles.
Listing status. Agency and signalling theories support this variable. Companies listed
in multiple and foreign stock exchanges are argued to have greater agency problems.
Consequently, voluntary disclosure reduces the monitoring costs of shareholders.
Voluntary disclosure can also be associated with a capital-needs hypothesis, that is,
with a companys objective to raise capital in foreign markets at the lowest possible
cost (Cooke, 1989b).
Listing status in organised and prestigious markets can also be used by a rm to
provide signals to stakeholders about a companys nancial strength. Several
empirical studies have found a signicant association between listing status and extent
of disclosure (Singhvi and Desai, 1971; Firth, 1979; Cooke, 1989a, 1992; Hossain et al.,
1995; Wallace et al., 1994; Giner, 1997). Listing status is a categoric variable, coded 1 if
the company is also listed in one foreign stock exchange or multi-listed, and 0
otherwise.
H7. Companies listed on foreign stock exchanges are more likely to have levels of
voluntary disclosure of intangibles information.
Foreign activity. Another possible motive for increased voluntary disclosure is the
degree of foreign activity of the rm. Managers of companies operating in several
geographical areas have to control a greater amount of information, due to the higher
complexity of the rms operations (Cooke, 1989b). They are prone to increase their
voluntary disclosure to show their international presence to stakeholders as a
perceived good signal. Cooke (1989b), Raffournier (1995) and Depoers (2000) have
conrmed this argument. The proxy for foreign activity is the exports-to-sales ratio.
H8. The extent of voluntary disclosure of intangibles information is positively
related to the internationalisation of the rm.
Research design
Sample
To assess the potential associations between voluntary disclosure of intangibles (in
annual reports, and in particular, the Management Report and Chairmans Letter) and
rm characteristics, this study analyses disclosures by listed companies in Portugal.
Our study includes all companies listed on the Portuguese Stock Exchange Euronext
Lisbon as at 31 December 2003. These companies are required to comply with the
requirements of the Comissa o do Mercado de Valores Mobiliarios (CMVM the
Portuguese Securities Market Commission) and Euronext concerning nancial
disclosures and the quality of information provided to stakeholders. The sample
comprises the annual reports of 56 companies for 2003: 49 listed on the main market
and seven on the second market of Euronext Lisbon. These annual reports are
available on the Portuguese Securities Market Commission web site (www.cmvm.pt).
Portuguese stock
market
17
The dependent variable: index of voluntary disclosure of intangibles
Empirical research has used disclosure indices to evaluate the extent and quality of
information of a mandatory and voluntary nature that is disclosed by rms (Singhvi
and Desai, 1971). Disclosure indices are extensive lists of selected annual report items
which are duly weighted (based on subjective criteria of usefulness to user group
targets) to measure the extent of the disclosure (Marston and Shrives, 1991). But a
major drawback is the subjective judgment involved in their construction. An
additional difculty occurs in replicating the analysis and/or making comparisons
(Marston and Shrives, 1991). However, the extent to which such indexes are deployed is
indicative of their usefulness as a research tool.
Based on prior research, we use a disclosure index as a dependent variable. To
construct the index, the consolidated annual reports of all 56 rms were analysed,
inuenced by argument that disclosure levels in annual reports are correlated
positively with the amount of disclosure provided by other media; and that annual
reports are generally one of the most important sources of corporate information (Lang
and Lundholm, 1993). Nevertheless, we are aware that companies have diverse
communication channels to voluntarily disclose information (these include private
channels, such as internet sites, conference calls to analysts, press releases, and
corporate newsletters).
The emphasis of this study is on analysing disclosures in the Management Report
and Chairmans Letter, because this part of the annual report is a suitable and
convenient medium for making voluntary disclosures. The contents are not required to
conform totally to accounting conventions. The Chairmans Letter is not a mandatory
document.
In Portugal, the Consolidated Management Report is required to be prepared in
accord with article 508C of the Codigo das Sociedades Comerciais[3] (the Portuguese
code of commercial companies), and to provide a fair and true view of the business
affairs and the situation of companies in the consolidation. The Consolidated
Management Report should also include information about the most important events
that have occurred after the balance sheet date; the forecasted development of
companies belonging to the group; the activities of the companies in terms of R&D; and
the number of shares, including the nominal (or accounting) value of the parent entitys
share of nancial investments in the group companies equity[4]. Listed companies are
required also to comply with CMVM Regulation No. 1/2003 about corporate
governance including in annual report information about disclosures, shareholders
representation and the right to vote, company rules, and the prole of the board of
directors.
The research methods used in several studies (Guthrie et al., 2004) focus on what is
reported. To provide further understanding of this, we conducted a content analysis by
coding qualitative and quantitative information into pre-dened categories. The choice
of these categories, and the items chosen to comprise each category, was based on prior
literature (Edvinsson and Malone, 1999; Stewart, 1999; Sveiby, 1997; Brooking, 1997,
etc.), guidelines and recommendations of several institutions (FASB, 2001; Meritum,
2002; DATI, 2000; Nordika Industrial Fund, 2001), and the common items used in
empirical studies of intellectual capital reporting practices in different countries,
including Australia (Guthrie and Petty, 2000), Ireland (Brennan, 2001), Italy (Bozzolan
et al., 2003), Portugal (Rodrigues and Oliveira, 2002), Canada (Bontis, 2003), Sweden
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(Olsson, 2001, 2004), and Spain (Garc a-Meca et al., 2005). These sources offered some
theoretical and empirical support and some comparability. We embrace the three most
common classications of intellectual capital: human capital[5], structural capital[6],
and relational capital[7] (Stewart, 1999; Sveiby, 1997; Meritum, 2002), together with the
intellectual capital attributes presented by Brooking (1997).
First, we pilot tested ve randomly chosen annual reports using an interrogation
protocol that had been developed from prior studies. However, we modied and
extended the items listed so that they converged better with the type of items reported
by Portuguese companies. All Management Reports and Chairmans Letters contained
in the consolidated annual reports were analysed by the rst author to guarantee
coherence and uniformity in data categorization.
The items selected for inclusion in the disclosure index are shown in Table I.
The intent of our index was to capture quantitative and qualitative levels of
disclosure. We gave a score of 2 to each item reported in quantitative terms; a score of 1
if the item is reported in qualitative terms (i.e. in a narrative or descriptive way); and a
score of zero if the item is not referred to. This is consistent with Bozzolan et al. (2003).
The heavier weighting given to quantitative disclosures is based on the assertion that
precise information is more useful and will enhance managements reputation and
credibility (Botosan, 1997). If the same information is repeated in the report, we only
consider this once.
However, each item of disclosure is considered equally important, i.e. the additive
model is unweighted, consistent with Cooke (1989a, b), Raffournier (1995) and Giner
(1997). This is because we do not focus on one particular user group, but rather all
users of corporate annual reports. Clearly, different user groups confer different
importance levels to information items.
A methodological problem inherent in this type of research is that every item is not
necessarily relevant to all companies. The procedure used by Cooke (1989a, b),
Raffournier (1995), and Giner (1997) is to exclude the items considered irrelevant to a
Structural Capital Relational Capital Human Capital
Management philosophy Brands and perception of the rms
products and services
Employees
Corporate culture Customers Know-how and experience
Management process Customers loyalty Education
Information systems Portfolio orders Formal training
Networking systems Company image Incentives and remuneration
Research and development
activities
Distribution channels and
structures
Initiative, motivation and
dedication
Patents, copyrights and
trademarks
Business collaborations Teamwork capacity and
spirit
Corporate know-how Agreements and favourable contracts Flexibility
Suppliers Productivity
Competitors Occupational health and
safety
Investors
Community involvement
Environmental activities
Financial entities
Table I.
Selected items
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19
company. This avoids penalizing the rm for not disclosing them. In case of doubt, the
item is maintained. In this study, only portfolio orders are not considered relevant to
all companies. Owing to the descriptive/narrative nature of the items Management
philosophy Corporate culture and Management process we considered them to
have a score of 1, and this was corroborated by the empirical analysis.
Taking account of the above considerations, the total score of the voluntary
disclosure index for intangibles (VDII), for a company is:
VDII
X
m
i1
d
i
m
where d
i
0 or 1 or 2, as follows: d
i
1 for disclosures in qualitative terms; d
i
2 for
disclosure in quantitative terms; d
i
0 if the disclosure item is not referred to; m the
weighted maximum number of (relevant) items a company may disclose.
The independent variables
Table II summarises the proxies used for each independent variable.
To classify a rm as belonging to a high or low intangible intensive industry, we
used the classication method of Fonseca et al. (2004), based on the United Nations
standard classication of industries according to Nace Rev1 (hereafter, NR)[8]. The
manufacturing sectors with high and medium-high technological intensity include:
Explanatory
variables
Expected
relationship Proxies
Structural variables
Firm size Total assets (in e)
Turnover (in e)
Number of employees
Market value (in e)
A
T
NE
MV
Leverage /2 Total liabilities/equity L
Ownership
concentration
2 Percentage of stocks owned by
the three most important and
known shareholders
OC
Size of auditor Dummy variable TA 1 if a Big 4 auditor,
TA 0 otherwise
Performance variables
Protability Net income before tax/total
assets ratio
P
Market variables
Industry Dummy variable I 1 if rm belongs to a high
intangibles intensive industry;
I 0 otherwise
Listing status Dummy variable LS 1 if rm is listed on one or
more foreign stock exchanges at
31 December,
LS 0 otherwise
Foreign activity Exports on-sales ratio FA
Table II.
Explanatory variables
and proxies
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.
chemical products (NR 24);
.
manufacture of ofce, accounting and computing machinery (NR 30);
.
manufacture of radio, television and communication equipment and apparatus
(NR 32);
.
manufacture of machinery and equipment n.e.c. (NR 29);
.
manufacture of electronic machinery and apparatus n.e.c. (NR 31);
.
manufacture of motor vehicles, trailers and semi-trailers (NR 34); and
.
manufacture of other transport equipment, except naval construction (NR 35,
except 35.1).
The services were classied according to knowledge intensity, based on the
classication introduced by the OECDs 2001 STI Scoreboard and used in its 2003
STI Scoreboard. The knowledge intensive services for companies include:
.
post and telecommunications (NR 64);
.
nancial intermediation (NR 65-67); and
.
renting and business activities (NR 71-74).
And other knowledge intensive services:
.
education services (NR 80); and
.
health and social services (NR 85).
NR was re-classied for some service companies when we became aware that their
R&D activity focused on other sectors, in particular those belonging to NR 74. Other
economic sectors (such as electricity, gas and water and construction) were not
considered high technology sectors unless the company belonged to the list of rms
with a high value of investment in R&D activities (in 1999 or in 2001) as determined by
the Observatory of Science and Superior Teaching of the Ministry of Science,
Technology and Superior Teaching (2002a, b)[9].
Table III presents the sample characterised by technological intensity. Low
technology companies comprise 52 per cent of the sample and high technology
companies comprise 48 per cent of the sample.
Intensity of technology N Per cent
Electricity, gas and water and construction 8 14
Low technology 11 20
Medium-low technology 2 4
Other services 8 14
Low technological intensity 29 52
High technology services 7 12
Intensive electricity, gas and water and construction 1 2
Medium-high technology 5 9
Other knowledge intensive services 14 25
High technological intensity 27 48
56 100.00
Table III.
Sample according to
technological intensity
Portuguese stock
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21
Results
Descriptive analysis
Table IV shows the number of rms that voluntarily disclosed intangibles information
by item and type of disclosure. We can see that the majority of companies report in a
qualitative form, with the item reported most frequently being Management process
n 55; Investors n 54; and Employees n 54: The least reported items
were Patents, Copyrights and Trademarks n 6; Flexibility n 7 and
Corporate know-how n 8: Relational capital items were the most frequently
reported (mean 33.29, 8 items); followed by structural capital items (mean 30.13,
14 items), and human capital items (mean 26.6, 10 items).
Type of disclosure
Items
Number of
Companies Qualitative Quantitative
SC Management philosophy 29 29 0
SC Corporate culture 30 30 0
SC Management process 55 55 0
SC Information systems 39 39 2
SC Networking systems 51 51 5
SC Research and development activities 23 23 6
SC Patents, copyrights and trademarks 6 6 1
SC Corporate know-how 8 8 0
RC Brands and perception of the rms products
and services 31 31 11
RC Customers 50 50 21
RC Customers loyalty 20 20 0
RC Portfolio orders 13 11 9
RC Company image 21 21 4
RC Distribution channels and structures 36 35 19
RC Business collaborations 42 42 4
RC Agreements and favourable contracts 36 36 6
RC Suppliers 34 34 1
RC Competitors 44 42 29
RC Investors 54 54 8
RC Environmental activities 27 27 6
RC Community involvement 25 25 6
RC Financial entities 33 33 6
HC Employees 54 52 32
HC Know-how and experience 25 24 2
HC Education 14 13 7
HC Formal training 35 35 25
HC Incentives and remuneration 24 23 11
HC Initiative, motivation and dedication 38 37 4
HC Teamwork capacity and spirit 10 10 0
HC Flexibility 7 7 0
HC Productivity 38 34 11
HC Occupational health and safety 21 21 11
Notes: SC: structural capital; RC: relational capital; HC: human capital
Table IV.
Number of companies by
reported items and type
of disclosure
JHRCA
10,1
22
The descriptive statistics for all variables are reported in Table V. The VDII range of
scores varied from 5.75 to 72.22 per cent.
Firm size is measured by four variables: assets, turnover, number of employees and
market value. The potential for collinearity among these measures is conrmed by the
high coefcients in the correlation matrix (Pearson R: Table VI).
In Table VII, the Kaiser-Myer-Olkin (KMO) measure of sampling adequacy is 0.813,
showing high correlations among all variables, suggesting the use of principal
components analysis. This is also reinforced by Bartletts test of sphericity, which
conrms those correlations. The component computed accounts for 92 per cent of the
total variance in the original variables. The scores of this component, incorporating the
effects of the original collinear variables, are the rm size (S) variable of this study.
They are derived from the equation:
N Minimum Maximum Mean Std. deviation
Panel A: Continuous variables (m millions of euros)
VDII 56 0.058 0.722 0.303 0.154
A 56 6.2 m 351,780 m 11.5 m 48,106 m
T 56 3.4 m 23,742 m 1,669 m 3,603 m
NE 56 110 103,958 7291 16,399
MV 56 1 m 44,155 m 1,683 m 6,067 m
L 56 25.97 538.69 16.08 71.59
OC 56 7.79 99.36 62.89 20.53
P 56 20.3178 0.3194 0.0062 0.0851
FA 56 0.0000 0.9586 0.26645 0.2879
Panel B: Dummy variables
Frequency Per cent
TA 0 16 28.6
1 40 71.4
I 0 29 51.8
1 27 48.2
LS 0 49 87.5
1 7 12.5
Total 56 100.0
Table V.
Descriptive statistics
A T NE MV
Correlation
A 1.000 0.896 0.827 0.965
T 0.896 1.000 0.898 0.922
NE 0.827 0.898 1.000 0.852
MV 0.965 0.922 0.852 1.000
Sig. (1-tailed)
A 0.000 0.000 0.000
T 0.000 0.000 0.000
NE 0.000 0.000 0.000
MV 0.000 0.000 0.000
Table VI.
Correlation matrix
Portuguese stock
market
23
S 0:975
*
MV 0:969
*
T 0:962
*
A 0:931
*
NE
Analysis of estimation results
After incorporating the derived rm size (S), the regression model used to test the
hypotheses was:
VDII
i
a
0
a
1
S
i
a
2
L
i
a
3
OC
i
a
4
TA
i
a
5
P
i
a
6
I
i
a
7
LS
i
a
8
FA
i
e
i
Where L, leverage (total liabilities/equity); OC, ownership concentration; TA, type of
auditor; P, prots; I, industry; LS, listing status; and FA, foreign activity.
To analyse the stability of the regression equation we excluded the outliers and
inuential observations. Five observations were found. Correlations among variables
were determined for the new sample (Table VIII).
The correlations between independent variables and the disclosure index are
signicant at the 1 per cent level for size (S), ownership concentration (OC), type of
auditor (TA), industry (I) and listing status (LS), all with signs as predicted.
A new model was estimated and the assumptions underlying the regression model
were tested again for null covariance, normal distribution of residuals, and
multicollinearity. Heteroscedasticity was corrected by the White matrix. Table IX
presents the regression results.
The adjusted R
2
of 0.574 is acceptable for this type of analysis: it is greater than the
adjusted R
2
of 0.45 obtained from the total sample (the exclusion of outliers and
inuential observations improved the regression adjustment). The model is globally
statistically signicant r 0:00:
After the White matrix correction, LS is not statistically signicant, and does not
conrm the results of the univariate analysis. The TA, I, and OC are statistically
signicant at the 5 per cent level, while S is statistically signicant at the 10 per cent
level. For these four variables the expected signs of the coefcients are veried. The
results conrm four hypotheses: H1, H3, H4 and H6. So, larger rms, rms with a
lower shareholder concentration, rms with Big 4 auditors, and rms belonging to
high intangibles intensive industries, appear to disclose more information about
intangibles voluntarily. The other hypotheses not supported by the model results are:
H2 (leverage); H5 (protability); H7 (listing status) and H8 (foreign activity).
Next we performed stepwise regression with backward elimination[10]. The
signicant independent variables are: S, OC, TA, I, and LS. The deleted variables were
L, P and FA. Table X shows the results of the regression including only those
variables.
The results of this regression support the ndings of the univariate analysis. There
is a statistically signicant inuence at the 5 per cent level of TA, OC, I and S on the
voluntary reporting of intangibles. LS is statistically signicant at the 10 per cent level.
Overall, the results suggest that the factors with most inuence on the level of
voluntary disclosure of intangibles are S, I, TA and OC. LS has a moderate inuence.
The results of the regressions do not support hypotheses H2 (leverage); H5
(protability) and H8 (foreign activity).
JHRCA
10,1
24
P
a
n
e
l
A
:
K
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d
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Table VII.
Portuguese stock
market
25
Conclusions
Using Portuguese data for 2003, this study validates and extends knowledge provided
by prior empirical studies of the factors inuencing the voluntary disclosure of
intangibles information in company annual reports.
Drawing from prior literature on voluntary disclosure, we computed a voluntary
disclosure index for intangibles and formulated a set of hypotheses based on different
theoretical foundations of the voluntary reporting of intangibles. Univariate analysis
showed a signicant inuence of S, OC, TA, I, and LS on the voluntary reporting of
intangibles. Multivariate analysis showed that TA, OC, I, S (and to a lesser extent, LS),
provide a satisfactory basis for explaining rm behaviour towards the voluntary
provision of intangibles information.
In the small capital market of Portugal, Big 4 auditor rms seem to play an
important role in the disclosure of voluntary information about intangibles. Further
research seems warranted to investigate the nature of the impetus that these rms
provide for the voluntary disclosure of intangibles information. This could be
undertaken with a view to spreading any protocols or techniques to non-Big 4 audit
rms, possibly though the continuing professional development activities of
professional accounting bodies in Portugal.
Our ndings have other implications. Annual reports are still important vehicles for
corporate managers to disclose voluntary information, but it is notable that the
frequency of disclosures in the area of Human Capital lags well behind that in the areas
of Relational Capital and Structural Capital. This study should assist accounting
standards setters and corporate reporting regulators to better understand the factors
that explain the voluntary disclosure of intangibles information by rms. They should
then draw upon this knowledge when formulating future accounting standards and
corporate reporting recommendations. As a simple example of this, the empirical
evidence we have provided reveals that extant incentives to disclose intangibles
information dealing with Human Capital have produced a lower mean frequency of
voluntary disclosures than for Relational Capital and Structural Capital. The causes
and implications of these ndings merit closer scrutiny, possibly as part of a quest to
identify the nature of any regulatory intervention that is required to mandate
appropriate disclosures.
VDII S L OC TA P I LS FA
VDII 1 0.58
* *
0.15 2 0.47
* *
0.50
* *
0.09 0.49
* *
0.55
* *
20.04
S 1 0.22 20.35
*
0.34
*
0.12 0.30
*
0.40
* *
0.07
L 1 20.12 0.03 20.21 0.32
*
0.12 20.07
OC 1 0.03 0.08 20.11 20.45
* *
0.17
TA 1 0.17 0.41
* *
0.21 0.20
P 1 20.15 0.09 0.03
I 1 0.23 0.01
LS 1 20.13
FA 1
Notes:
* *
Correlation is signicant at the 0.01 level (two-tailed);
*
correlation is signicant at the 0.05
level (two-tailed)
Table VIII.
Correlations (Pearson R)
JHRCA
10,1
26
P
a
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l
A
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0
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2
0
.
6
3
8
0
.
5
2
6
9
Table IX.
Results of regression
model without outliers
and inuential
observations
Portuguese stock
market
27
Limitations and future research
This study has focused on only one disclosure vehicle one section of the annual
report, the Management Report and Chairmans Letter. Future research could extend
our study to include other disclosure channels, such as press releases, conference calls
to nancial analysts, and online announcements.
The small sample size used is a limitation too, but it is unavoidable in the small
Portuguese capital market. Another limitation is the use of content analysis and
reliance on the subjectivity of a researcher to identify and classify the nature of
reported information. No software-assisted electronic searches were used to identify
the information disclosed. This should not be an impediment because electronic
searches are not robust, and do not capture the extent or the nature of the intellectual
capital information disclosed (Beattie and Thomson, 2005)[11]. Whilst it is impossible
to remove researcher subjectivity completely, the value of the disclosure scores
obtained, and their subsequent use in testing hypotheses, should be viewed cautiously.
Like most disclosure studies, the present study has examined the extent of voluntary
disclosure cross-sectionally. Longitudinal studies offer the prospect of obtaining more
robust results and should provide protable areas for future research.
The increased demand by stakeholders for relevant information, prompted by the
many frauds and scandals of the last decade, has demonstrated the need for there to be
better rules and practices for nancial information disclosure to improve trust in
accounting. In general, the academic community and accounting standards setters are
aware of the importance of issuing guidelines on how to improve nancial reports.
There is much to be done to advance the nancial reporting of intangibles. Knowledge
of the factors inuencing the voluntary reporting of intangibles, provided here, should
be an early step in this process of improvement. To understand what are the most
important theories of voluntary disclosures of intangible assets and how they explain
the information companies provided voluntarily is the next step of our research. Future
research, possibly conducted by interview or questionnaire survey, could consider the
needs of users of accounting information (namely investors) in terms of reporting
intangibles assets and/or liabilities and study the implications for companies of the
disclosure of this kind of information. The appropriate standardisation of some
mandatory disclosures by all companies should be considered urgent by the academic
community and accounting standards setters.
Coefcient Std. error t-statistic Prob.
Constant 0.333 0.058 5.709 0.000
S 0.090 0.044 2.057 0.046
OC 20.002 0.001 22.298 0.026
TA 0.092 0.035 2.635 0.012
I 0.067 0.031 2.181 0.035
LS 0.112 0.062 1.799 0.079
R
2
0.6368 Mean dependent var. 0.2940
Adjusted R
2
0.5964 SD dependent var. 0.1482
SE of regression 0.0941 Akaike info criterion 21.7778
Sum squared resid 0.3988 Schwarz criterion 21.5506
Log likelihood 51.335 Durbin-Watson stat. 2.2276
Table X.
Regression results
VDII
i
b
0
b
1
S
b
2
OC b
3
TA
b
4
I b
5
LS u
i

JHRCA
10,1
28
Notes
1. The expressions Intangibles and Intellectual Capital are used synonymously. However,
Intangibles is an accounting term, while Intellectual Capital arises from human resources
literature (Canibano and Sanchez, 2001). Intellectual capital is the combination of a
companys human, organizational and relational resources, but is more than the sum of these
three components. It includes how a rms knowledge generates value.
2. Bozzolan et al. (2003) used the listing segments of the Italian Stock Exchange as the variable
group in their sample companies: the ones listed in the New Market are considered high
prole whilst the rms listed in the other segments are considered low prole.
3. This article was changed recently by Decree-Law No. 35, 2005, which aims to translate into
Portuguese law the European Directives and Regulations related to the adoption of IFRS,
namely Directive No. 2003/51/CE.
4. This information is not required if it is present in the notes to the consolidated nancial
statements.
5. Human capital is dened as the knowledge that employees take with them when they leave
the rm. It includes the knowledge, skills, experiences and abilities of people. (Meritum,
2002, p. 63).
6. Structural capital is dened as the knowledge that stays within the rm at the end of the
working day. It comprises the organizational routines, procedures, systems, cultures,
databases, etc. (Meritum, 2002, p. 63).
7. Relational capital is dened as all resources linked to the external relationships of the rm,
with customers, suppliers or R&D partners. It comprises that part of human and structural
capital involved with the companys relations with stakeholders (investors, creditors,
customers, suppliers, etc.). (Meritum, 2002, p. 63).
8. Statistical classication of economic activities in the European community.
9. University and Polytechnic Teaching.
10. This method involves computing a regression equation with all the predictor variables, then
going back and deleting independent variables that do not contribute signicantly.
11. Beattie and Thomson (2005) recommend the adoption of manual analysis and a detailed list
of intellectual capital components accompanied by detailed coding rules to increase the
transparency, facilitating replication, comparison and the development of shared meanings.
References
Aikten, M., Hooper, C. and Pickering, J. (1997), Determinants of voluntary disclosure of segment
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Corresponding author
L dia Oliveira can be contacted at: lidiaoliv@eeg.uminho.pt
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